Exam for Bentley University AC 621 Managerial Accounting
,TABLE OF CONTENTS
Bentley University AC 621 Managerial Accounting
Fall 2026–2027
1. Exam Instructions
2. Formula Reference
3. Practice Exam Set 1 — Core Managerial Accounting
4. Practice Exam Set 2 — Strategic Planning, Control and Analytics
5. Practice Exam Set 3 — Comprehensive Final Examination
6. Set Answer Keys and Distribution Sequences
7. Complete Master Answer Key
8. High-Yield Exam Strategies
9. Final Review Checklist
Bentley University AC 621 Managerial Accounting
Fall 2026–2027 Premium Practice Exam Bank
Question 1
The following maintenance-cost observations were extracted from Falcon Manufacturing’s accounting system:
Machine Hours Total Maintenance Cost
8,000 $42,000
12,000 $58,000
Using the high-low method, what maintenance cost should management expect at 10,500 machine hours?
A. $48,000
B. $50,500
C. $52,000
D. $55,000
Correct Answer: C. $52,000
Rationale: Variable cost is ($58,000 − $42,000) ÷ (12,000 − 8,000), or $4 per machine hour. Fixed cost is therefore
$42,000 − (8,000 × $4) = $10,000. At 10,500 hours, estimated cost equals $10,000 + (10,500 × $4) = $52,000.
The estimate assumes that cost behavior remains within the relevant range.
Why the other options are less appropriate: They result from excluding fixed cost, using an incorrect activity
difference, or averaging total costs rather than separating their components.
Managerial Pearl: The high-low method uses the highest and lowest activity levels, not necessarily the highest
and lowest total costs.
Exam Strategy: Write 𝑌 = 𝑎 + 𝑏𝑋before inserting the figures; this prevents confusion between fixed and
variable components.
Question 2
A consulting division charges $80 per service hour and incurs $52 of variable cost per hour. Annual fixed costs
are $420,000. If the division’s income-tax rate is 30%, how many service hours must be sold to earn an after-tax
profit of $126,000?
,A. 21,429 hours
B. 19,500 hours
C. 23,250 hours
D. 24,857 hours
Correct Answer: A. 21,429 hours
Rationale: The contribution margin is $80 − $52 = $28 per hour. An after-tax target of $126,000 requires pretax
income of $126,000 ÷ 0.70 = $180,000. Required contribution margin is therefore $420,000 + $180,000 =
$600,000. Dividing $600,000 by $28 produces 21,428.57, which must be rounded up to 21,429 hours.
Why the other options are less appropriate: They either use after-tax income directly, multiply instead of divide
by the after-tax percentage, or use sales price rather than contribution margin.
Managerial Pearl: Always convert an after-tax target to pretax income before applying the CVP formula.
Exam Strategy: When the result includes a fraction of a unit, round upward because the lower whole number
will not achieve the target.
Question 3
A special customer offers to purchase 20,000 units for $37 each. Normal unit manufacturing costs are:
Cost Component Per Unit
Direct materials $14.00
Direct labor $7.00
Variable overhead $4.00
Allocated fixed overhead $4.00
The company has sufficient unused capacity. Special packaging will cost $1.50 per unit, and regular sales will not
be affected. What should management do?
A. Reject because the price is below the normal manufacturing cost
B. Reject because the order would reduce profit by $30,000
C. Accept because profit would increase by $160,000
D. Accept because profit would increase by $210,000
Correct Answer: D. Accept because profit would increase by $210,000
Rationale: Allocated fixed overhead is unavoidable and therefore irrelevant. Relevant cost per unit is $14 + $7 +
$4 + $1.50 = $26.50. The special order produces an incremental contribution of $37 − $26.50 = $10.50 per unit.
Total operating income increases by $10.50 × 20,000 = $210,000.
Why the other options are less appropriate: Comparing the price with full cost incorrectly treats allocated fixed
overhead as avoidable; the other profit figures omit or misclassify relevant costs.
Managerial Pearl: A price below full cost can still be profitable when unused capacity exists.
Exam Strategy: Mark each cost as “avoidable,” “unavoidable,” or “opportunity cost” before completing special-
order calculations.
Question 4
Bentley Components requires 40,000 electronic modules annually. The current unit cost is:
Component Cost
Direct materials $12
Direct labor $8
,Component Cost
Variable overhead $4
Fixed overhead $10
A supplier offers the modules for $31 each. Sixty percent of fixed overhead would be avoided if production
stopped. No alternative use exists for the facilities. Which decision is financially preferable?
A. Buy and save $120,000
B. Make and save $40,000
C. Buy and save $40,000
D. Make and save $280,000
Correct Answer: B. Make and save $40,000
Rationale: Relevant manufacturing cost is $12 + $8 + $4 + ($10 × 60%) = $30 per unit. Buying costs $31, making
purchasing $1 more expensive per unit. For 40,000 units, internal production saves $40,000. The unavoidable
40% of fixed overhead will continue under either alternative and must be excluded.
Why the other options are less appropriate: They include unavoidable fixed overhead, reverse the cost
difference, or multiply using an incorrect unit amount.
Managerial Pearl: “Fixed” does not automatically mean irrelevant; an avoidable fixed cost is relevant.
Exam Strategy: Include only costs that change between the alternatives.
Question 5
A division reports sales of $1,200,000, variable costs of $720,000, and fixed costs of $360,000. If sales decline by
8% while cost relationships remain unchanged, approximately what operating income should management
expect?
A. $72,000
B. $81,600
C. $88,800
D. $110,400
Correct Answer: B. $81,600
Rationale: Contribution margin is $480,000 and operating income is $120,000, producing a degree of operating
leverage of 4. An 8% sales decrease therefore causes an approximate 32% decline in operating income. The
expected income is $120,000 × 68% = $81,600. High fixed costs magnify the effect of changing sales.
Why the other options are less appropriate: They apply the sales percentage directly to income or use sales and
fixed costs rather than contribution margin in the leverage calculation.
Managerial Pearl: Operating leverage increases both potential reward and operating risk.
Exam Strategy: Use percentage change in income = degree of operating leverage × percentage change in sales.
Question 6
An activity-based costing system contains the following pools:
Activity Pool Total Cost Expected Driver Volume
Production setups $360,000 120 setups
Quality inspections $240,000 8,000 inspections
Product K requires 15 setups and 600 inspections. How much overhead should be assigned to Product K?
A. $45,000
B. $54,000
,C. $57,000
D. $63,000
Correct Answer: D. $63,000
Rationale: The setup rate is $360,000 ÷ 120 = $3,000 per setup, assigning $45,000 to Product K. The inspection
rate is $240,000 ÷ 8,000 = $30 per inspection, assigning another $18,000. Total assigned overhead is therefore
$63,000. ABC traces overhead using the activities that cause costs to be incurred.
Why the other options are less appropriate: They reflect only one activity pool or apply the driver rates
incorrectly.
Managerial Pearl: Use a separate rate for every activity pool rather than one plantwide allocation rate.
Exam Strategy: Calculate and label every activity rate before assigning costs to the product.
Question 7
Machine time is the company’s production constraint.
Product Contribution Margin per Unit Machine Hours per Unit
Alpha $45.00 3.0
Beta $32.00 1.6
Gamma $54.00 4.0
Which product should receive first priority when allocating the constrained resource?
A. Beta
B. Alpha
C. Gamma
D. Alpha and Gamma equally
Correct Answer: A. Beta
Rationale: Contribution margin per constrained hour is $15 for Alpha, $20 for Beta, and $13.50 for Gamma. Beta
generates the greatest contribution from each scarce machine hour and should receive first priority. Selecting the
product with the highest unit contribution margin would misuse the bottleneck. Resource productivity, not unit
margin alone, drives the ranking.
Why the other options are less appropriate: Alpha and Gamma have higher or comparable unit margins but
generate less contribution per constrained hour.
Managerial Pearl: Rank products by contribution margin per unit of the scarce resource.
Exam Strategy: When the question mentions a bottleneck, immediately divide contribution margin by the
constrained input.
Question 8
Falcon Retail prepares the following monthly cash schedule:
Item Amount
Beginning cash $48,000
Customer collections $220,000
Inventory payments $125,000
Operating expenses, including $8,000 depreciation $72,000
Equipment purchase $30,000
,Item Amount
Minimum required cash balance $40,000
How much must the company borrow during the month?
A. $21,000
B. $8,000
C. $0
D. $13,000
Correct Answer: C. $0
Rationale: Available cash is $48,000 + $220,000 = $268,000. Cash operating expenses are only $64,000 because
depreciation does not require cash. Total cash disbursements are $125,000 + $64,000 + $30,000 = $219,000,
leaving $49,000. Because $49,000 exceeds the $40,000 minimum, no borrowing is necessary.
Why the other options are less appropriate: They treat depreciation as a cash payment or ignore beginning cash
and the minimum-balance requirement.
Managerial Pearl: Depreciation affects operating income but not the cash budget.
Exam Strategy: Cross out every explicitly noncash item before totaling cash disbursements.
Question 9
A company sells Products R and S in a constant sales mix of three units of R for every two units of S. Unit
contribution margins are $24 and $36, respectively. If fixed costs are $576,000, how many total units must be
sold to break even?
A. 12,000 units
B. 16,000 units
C. 18,000 units
D. 20,000 units
Correct Answer: D. 20,000 units
Rationale: A five-unit composite bundle produces contribution margin of (3 × $24) + (2 × $36) = $144. The
company must sell $576,000 ÷ $144 = 4,000 composite bundles. Each bundle contains five units, so total break-
even volume is 20,000 units. This consists of 12,000 units of R and 8,000 units of S.
Why the other options are less appropriate: They use only one product’s contribution margin or mistake
composite bundles for individual units.
Managerial Pearl: A multiproduct break-even calculation depends on the assumed sales mix.
Exam Strategy: Create one composite bundle reflecting the sales ratio before calculating break-even volume.
Question 10
The standard price for material is $5.00 per kilogram. During the month, the company purchased and used
15,000 kilograms at $5.40 per kilogram. What is the direct-material price variance?
A. $6,000 unfavorable
B. $6,000 favorable
C. $81,000 unfavorable
D. $75,000 favorable
Correct Answer: A. $6,000 unfavorable
Rationale: The material price variance is actual quantity multiplied by the difference between actual and
standard price. It equals 15,000 × ($5.40 − $5.00) = $6,000 unfavorable. The variance is unfavorable because the
actual price exceeded the standard. Total material cost is not itself the price variance.
,Why the other options are less appropriate: They reverse the favorable/unfavorable designation or report total
actual or standard cost.
Managerial Pearl: Price variance evaluates what purchasing paid—not how efficiently production used materials.
Exam Strategy: If actual price is greater than standard price, the price variance must be unfavorable.
Question 11
Variable overhead is budgeted at $7.50 per unit, and monthly fixed overhead is $54,000. Actual production was
9,000 units and actual total overhead was $126,000. How should performance be evaluated against the flexible
budget?
A. $4,500 favorable
B. $13,500 unfavorable
C. $4,500 unfavorable
D. $18,000 favorable
Correct Answer: C. $4,500 unfavorable
Rationale: At 9,000 units, flexible-budget overhead equals (9,000 × $7.50) + $54,000 = $121,500. Actual
overhead of $126,000 exceeds the activity-adjusted budget by $4,500. The result is unfavorable because more
cost was incurred than should have been incurred for the actual output. A static budget would provide a
distorted comparison.
Why the other options are less appropriate: They reverse the variance direction or compare actual cost with a
budget based on a different activity level.
Managerial Pearl: Flexible budgets separate activity-volume effects from cost-control performance.
Exam Strategy: Recalculate variable cost at actual activity, but keep budgeted fixed cost unchanged.
Question 12
Standard labor time is 0.60 hour per unit at $22 per hour. Employees produced 10,000 units using 6,200 hours.
What is the direct-labor efficiency variance?
A. $4,400 favorable
B. $4,400 unfavorable
C. $13,200 unfavorable
D. $136,400 unfavorable
Correct Answer: B. $4,400 unfavorable
Rationale: Standard hours allowed are 10,000 × 0.60 = 6,000 hours. The company used 200 more hours than
allowed. Multiplying the excess hours by the standard rate gives 200 × $22 = $4,400 unfavorable. The calculation
isolates labor-time efficiency from differences in hourly wage rates.
Why the other options are less appropriate: They reverse the direction, use total standard labor cost, or multiply
by an incorrect number of hours.
Managerial Pearl: Efficiency variances are valued at the standard rate so that wage-rate effects remain separate.
Exam Strategy: Compare actual hours with standard hours allowed for actual output, not budgeted output.
Question 13
An investment center reports average operating assets of $4,000,000 and operating income of $560,000.
Corporate management requires an 11% return. What is the center’s residual income?
A. $120,000
B. $176,000
C. $440,000
D. $504,000
,Correct Answer: A. $120,000
Rationale: The required return is $4,000,000 × 11% = $440,000. Residual income is actual operating income
minus that required return, or $560,000 − $440,000 = $120,000. Unlike ROI, residual income is expressed as a
dollar amount. A positive result shows that the division exceeded the company’s minimum return.
Why the other options are less appropriate: They report the required return, confuse ROI with residual income,
or apply the hurdle rate to income rather than assets.
Managerial Pearl: Residual income can encourage managers to accept profitable projects that might reduce
their existing ROI.
Exam Strategy: Remember: 𝑅𝐼 = 𝐼𝑛𝑐𝑜𝑚𝑒 − (𝐴𝑠𝑠𝑒𝑡𝑠 × 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑅𝑎𝑡𝑒).
Question 14
A selling division is operating at full capacity. Its product sells externally for $40, incurs $22 of variable
production cost, and requires a $3 variable selling cost on external sales. The selling cost would be avoided on
internal transfers. What is the minimum acceptable transfer price?
A. $22
B. $25
C. $40
D. $37
Correct Answer: D. $37
Rationale: At full capacity, an internal transfer displaces an external sale. The division incurs $22 of production
cost and sacrifices an external contribution margin of $40 − $22 − $3 = $15. The minimum transfer price is
therefore $22 + $15 = $37. Equivalently, it is the external price less the $3 selling cost avoided on an internal
transfer.
Why the other options are less appropriate: They omit opportunity cost, include the avoided selling cost, or
provide no benefit to the buying division.
Managerial Pearl: Minimum transfer price equals incremental cost plus opportunity cost.
Exam Strategy: First determine whether idle capacity exists; capacity status controls the opportunity-cost
component.
Question 15
Old equipment has a $140,000 book value, can be sold immediately for $38,000, and will incur $92,000 of
annual operating costs for four years. New equipment costs $240,000, will incur $38,000 of annual operating
costs, and will have a $20,000 terminal value after four years. Ignoring discounting, which conclusion is correct?
A. Keep the old equipment because its book value is lower
B. Replace it because total relevant profit improves by $34,000
C. Keep it because replacement reduces profit by $4,000
D. Replace it because the improvement is $174,000
Correct Answer: B. Replace it because total relevant profit improves by $34,000
Rationale: Operating-cost savings are ($92,000 − $38,000) × 4 = $216,000. Replacement also produces $38,000
from selling the old equipment and a $20,000 terminal value. Net benefit is $216,000 + $38,000 + $20,000 −
$240,000 = $34,000. The old equipment’s book value is a sunk cost and does not affect the decision.
Why the other options are less appropriate: They rely on book value or omit disposal proceeds, operating
savings, or terminal value.
Managerial Pearl: Book value influences accounting gains and losses but not the relevant economics of
replacement.
,Exam Strategy: Draw two columns—keep and replace—and include only future cash flows that differ.
Question 16
Which measure belongs primarily to the internal-business-process perspective of a balanced scorecard?
A. Employee training hours
B. Customer retention rate
C. Order-fulfillment cycle time
D. Return on invested capital
Correct Answer: C. Order-fulfillment cycle time
Rationale: Order-fulfillment time measures the efficiency of an internal operating process. Employee training is
normally classified under learning and growth, while customer retention belongs to the customer perspective.
Return on invested capital is a financial measure. A balanced scorecard connects these different perspectives to
organizational strategy.
Why the other options are less appropriate: Each belongs to another recognized scorecard perspective.
Managerial Pearl: Internal-process measures explain what the organization must perform exceptionally well.
Exam Strategy: Classify the stakeholder or process being measured before considering whether the result is
financial or nonfinancial.
Question 17
A controller is instructed to postpone recording supplier invoices received before year-end so that the division
will achieve its profit target. What is the controller’s most appropriate initial response?
A. Comply because the invoices can be recorded next period
B. Explain the misstatement, refuse the treatment, and follow established escalation procedures
C. Record only invoices that suppliers are likely to pursue immediately
D. Resign without documenting or discussing the issue
Correct Answer: B. Explain the misstatement, refuse the treatment, and follow established escalation
procedures
Rationale: Deliberately delaying valid liabilities and expenses misstates performance and violates professional
integrity. The controller should explain the accounting consequences, refuse to participate, document the matter,
and use the organization’s established reporting hierarchy. Immediate resignation may eventually become
necessary, but it is usually not the first response. Ethical reporting takes priority over a short-term performance
target.
Why the other options are less appropriate: They facilitate manipulation, use arbitrary recognition criteria, or
bypass reasonable internal resolution procedures.
Managerial Pearl: Performance systems create risk when incentives reward results without reinforcing ethical
boundaries.
Exam Strategy: In ethics questions, select the response that preserves accuracy, documents the concern, and
uses proper escalation.
Question 18
A regression model estimates monthly logistics cost as:
𝑌 = $125,000 + $3.20𝑋
where 𝑋is the number of transactions. At 40,000 transactions, actual logistics cost was $268,000. What does the
model indicate?
A. Actual cost was $15,000 above predicted cost
B. Actual cost was $15,000 below predicted cost
, C. Predicted cost was $268,000
D. Actual cost exactly matched expected cost
Correct Answer: A. Actual cost was $15,000 above predicted cost
Rationale: Predicted cost equals $125,000 + ($3.20 × 40,000) = $253,000. Actual cost was $268,000, which is
$15,000 higher than predicted. The difference warrants investigation but does not automatically prove poor
management. Data quality, unusual conditions, and model fit should be examined before assigning responsibility.
Why the other options are less appropriate: They reverse the difference, confuse actual and predicted cost, or
ignore the regression calculation.
Managerial Pearl: A predictive model creates an analytical benchmark, not automatic proof of managerial fault.
Exam Strategy: Calculate the predicted value first; only then compare it with the actual observation.
Question 19
A joint product can be sold at split-off for $180,000 or processed further for $52,000 and sold for $248,000.
What is the best decision?
A. Sell at split-off because joint costs must be recovered
B. Sell at split-off because additional revenue is only $16,000
C. Process further because incremental profit is $52,000
D. Process further because incremental profit is $16,000
Correct Answer: D. Process further because incremental profit is $16,000
Rationale: Additional revenue from processing is $248,000 − $180,000 = $68,000. After deducting the $52,000
further-processing cost, incremental profit is $16,000. Joint costs incurred before split-off are common to both
alternatives and are irrelevant. Processing further is preferable because incremental revenue exceeds
incremental cost.
Why the other options are less appropriate: They treat sunk joint costs as relevant or confuse additional
revenue with additional profit.
Managerial Pearl: Joint-cost allocation is useful for reporting but generally irrelevant to sell-or-process-further
decisions.
Exam Strategy: Ignore all costs incurred before the decision point.
Question 20
A customer generates $500,000 of revenue and $320,000 of product cost. Customer-specific activities include
150 orders at $300 each, deliveries costing $36,000, and returns costing $24,000. What is the customer’s
profitability?
A. $99,000
B. $84,000
C. $75,000
D. $120,000
Correct Answer: C. $75,000
Rationale: Order-processing cost is 150 × $300 = $45,000. Total customer cost is $320,000 + $45,000 + $36,000 +
$24,000 = $425,000. Customer profit is therefore $500,000 − $425,000 = $75,000. Customer-level analysis
reveals costs that a conventional gross-margin calculation may conceal.
Why the other options are less appropriate: They omit one or more customer-support activities or calculate
gross margin instead of customer profit.
Managerial Pearl: High sales volume does not guarantee high customer profitability.
Exam Strategy: Separate product cost from order-, delivery-, return-, and customer-sustaining costs.
,TABLE OF CONTENTS
Bentley University AC 621 Managerial Accounting
Fall 2026–2027
1. Exam Instructions
2. Formula Reference
3. Practice Exam Set 1 — Core Managerial Accounting
4. Practice Exam Set 2 — Strategic Planning, Control and Analytics
5. Practice Exam Set 3 — Comprehensive Final Examination
6. Set Answer Keys and Distribution Sequences
7. Complete Master Answer Key
8. High-Yield Exam Strategies
9. Final Review Checklist
Bentley University AC 621 Managerial Accounting
Fall 2026–2027 Premium Practice Exam Bank
Question 1
The following maintenance-cost observations were extracted from Falcon Manufacturing’s accounting system:
Machine Hours Total Maintenance Cost
8,000 $42,000
12,000 $58,000
Using the high-low method, what maintenance cost should management expect at 10,500 machine hours?
A. $48,000
B. $50,500
C. $52,000
D. $55,000
Correct Answer: C. $52,000
Rationale: Variable cost is ($58,000 − $42,000) ÷ (12,000 − 8,000), or $4 per machine hour. Fixed cost is therefore
$42,000 − (8,000 × $4) = $10,000. At 10,500 hours, estimated cost equals $10,000 + (10,500 × $4) = $52,000.
The estimate assumes that cost behavior remains within the relevant range.
Why the other options are less appropriate: They result from excluding fixed cost, using an incorrect activity
difference, or averaging total costs rather than separating their components.
Managerial Pearl: The high-low method uses the highest and lowest activity levels, not necessarily the highest
and lowest total costs.
Exam Strategy: Write 𝑌 = 𝑎 + 𝑏𝑋before inserting the figures; this prevents confusion between fixed and
variable components.
Question 2
A consulting division charges $80 per service hour and incurs $52 of variable cost per hour. Annual fixed costs
are $420,000. If the division’s income-tax rate is 30%, how many service hours must be sold to earn an after-tax
profit of $126,000?
,A. 21,429 hours
B. 19,500 hours
C. 23,250 hours
D. 24,857 hours
Correct Answer: A. 21,429 hours
Rationale: The contribution margin is $80 − $52 = $28 per hour. An after-tax target of $126,000 requires pretax
income of $126,000 ÷ 0.70 = $180,000. Required contribution margin is therefore $420,000 + $180,000 =
$600,000. Dividing $600,000 by $28 produces 21,428.57, which must be rounded up to 21,429 hours.
Why the other options are less appropriate: They either use after-tax income directly, multiply instead of divide
by the after-tax percentage, or use sales price rather than contribution margin.
Managerial Pearl: Always convert an after-tax target to pretax income before applying the CVP formula.
Exam Strategy: When the result includes a fraction of a unit, round upward because the lower whole number
will not achieve the target.
Question 3
A special customer offers to purchase 20,000 units for $37 each. Normal unit manufacturing costs are:
Cost Component Per Unit
Direct materials $14.00
Direct labor $7.00
Variable overhead $4.00
Allocated fixed overhead $4.00
The company has sufficient unused capacity. Special packaging will cost $1.50 per unit, and regular sales will not
be affected. What should management do?
A. Reject because the price is below the normal manufacturing cost
B. Reject because the order would reduce profit by $30,000
C. Accept because profit would increase by $160,000
D. Accept because profit would increase by $210,000
Correct Answer: D. Accept because profit would increase by $210,000
Rationale: Allocated fixed overhead is unavoidable and therefore irrelevant. Relevant cost per unit is $14 + $7 +
$4 + $1.50 = $26.50. The special order produces an incremental contribution of $37 − $26.50 = $10.50 per unit.
Total operating income increases by $10.50 × 20,000 = $210,000.
Why the other options are less appropriate: Comparing the price with full cost incorrectly treats allocated fixed
overhead as avoidable; the other profit figures omit or misclassify relevant costs.
Managerial Pearl: A price below full cost can still be profitable when unused capacity exists.
Exam Strategy: Mark each cost as “avoidable,” “unavoidable,” or “opportunity cost” before completing special-
order calculations.
Question 4
Bentley Components requires 40,000 electronic modules annually. The current unit cost is:
Component Cost
Direct materials $12
Direct labor $8
,Component Cost
Variable overhead $4
Fixed overhead $10
A supplier offers the modules for $31 each. Sixty percent of fixed overhead would be avoided if production
stopped. No alternative use exists for the facilities. Which decision is financially preferable?
A. Buy and save $120,000
B. Make and save $40,000
C. Buy and save $40,000
D. Make and save $280,000
Correct Answer: B. Make and save $40,000
Rationale: Relevant manufacturing cost is $12 + $8 + $4 + ($10 × 60%) = $30 per unit. Buying costs $31, making
purchasing $1 more expensive per unit. For 40,000 units, internal production saves $40,000. The unavoidable
40% of fixed overhead will continue under either alternative and must be excluded.
Why the other options are less appropriate: They include unavoidable fixed overhead, reverse the cost
difference, or multiply using an incorrect unit amount.
Managerial Pearl: “Fixed” does not automatically mean irrelevant; an avoidable fixed cost is relevant.
Exam Strategy: Include only costs that change between the alternatives.
Question 5
A division reports sales of $1,200,000, variable costs of $720,000, and fixed costs of $360,000. If sales decline by
8% while cost relationships remain unchanged, approximately what operating income should management
expect?
A. $72,000
B. $81,600
C. $88,800
D. $110,400
Correct Answer: B. $81,600
Rationale: Contribution margin is $480,000 and operating income is $120,000, producing a degree of operating
leverage of 4. An 8% sales decrease therefore causes an approximate 32% decline in operating income. The
expected income is $120,000 × 68% = $81,600. High fixed costs magnify the effect of changing sales.
Why the other options are less appropriate: They apply the sales percentage directly to income or use sales and
fixed costs rather than contribution margin in the leverage calculation.
Managerial Pearl: Operating leverage increases both potential reward and operating risk.
Exam Strategy: Use percentage change in income = degree of operating leverage × percentage change in sales.
Question 6
An activity-based costing system contains the following pools:
Activity Pool Total Cost Expected Driver Volume
Production setups $360,000 120 setups
Quality inspections $240,000 8,000 inspections
Product K requires 15 setups and 600 inspections. How much overhead should be assigned to Product K?
A. $45,000
B. $54,000
,C. $57,000
D. $63,000
Correct Answer: D. $63,000
Rationale: The setup rate is $360,000 ÷ 120 = $3,000 per setup, assigning $45,000 to Product K. The inspection
rate is $240,000 ÷ 8,000 = $30 per inspection, assigning another $18,000. Total assigned overhead is therefore
$63,000. ABC traces overhead using the activities that cause costs to be incurred.
Why the other options are less appropriate: They reflect only one activity pool or apply the driver rates
incorrectly.
Managerial Pearl: Use a separate rate for every activity pool rather than one plantwide allocation rate.
Exam Strategy: Calculate and label every activity rate before assigning costs to the product.
Question 7
Machine time is the company’s production constraint.
Product Contribution Margin per Unit Machine Hours per Unit
Alpha $45.00 3.0
Beta $32.00 1.6
Gamma $54.00 4.0
Which product should receive first priority when allocating the constrained resource?
A. Beta
B. Alpha
C. Gamma
D. Alpha and Gamma equally
Correct Answer: A. Beta
Rationale: Contribution margin per constrained hour is $15 for Alpha, $20 for Beta, and $13.50 for Gamma. Beta
generates the greatest contribution from each scarce machine hour and should receive first priority. Selecting the
product with the highest unit contribution margin would misuse the bottleneck. Resource productivity, not unit
margin alone, drives the ranking.
Why the other options are less appropriate: Alpha and Gamma have higher or comparable unit margins but
generate less contribution per constrained hour.
Managerial Pearl: Rank products by contribution margin per unit of the scarce resource.
Exam Strategy: When the question mentions a bottleneck, immediately divide contribution margin by the
constrained input.
Question 8
Falcon Retail prepares the following monthly cash schedule:
Item Amount
Beginning cash $48,000
Customer collections $220,000
Inventory payments $125,000
Operating expenses, including $8,000 depreciation $72,000
Equipment purchase $30,000
,Item Amount
Minimum required cash balance $40,000
How much must the company borrow during the month?
A. $21,000
B. $8,000
C. $0
D. $13,000
Correct Answer: C. $0
Rationale: Available cash is $48,000 + $220,000 = $268,000. Cash operating expenses are only $64,000 because
depreciation does not require cash. Total cash disbursements are $125,000 + $64,000 + $30,000 = $219,000,
leaving $49,000. Because $49,000 exceeds the $40,000 minimum, no borrowing is necessary.
Why the other options are less appropriate: They treat depreciation as a cash payment or ignore beginning cash
and the minimum-balance requirement.
Managerial Pearl: Depreciation affects operating income but not the cash budget.
Exam Strategy: Cross out every explicitly noncash item before totaling cash disbursements.
Question 9
A company sells Products R and S in a constant sales mix of three units of R for every two units of S. Unit
contribution margins are $24 and $36, respectively. If fixed costs are $576,000, how many total units must be
sold to break even?
A. 12,000 units
B. 16,000 units
C. 18,000 units
D. 20,000 units
Correct Answer: D. 20,000 units
Rationale: A five-unit composite bundle produces contribution margin of (3 × $24) + (2 × $36) = $144. The
company must sell $576,000 ÷ $144 = 4,000 composite bundles. Each bundle contains five units, so total break-
even volume is 20,000 units. This consists of 12,000 units of R and 8,000 units of S.
Why the other options are less appropriate: They use only one product’s contribution margin or mistake
composite bundles for individual units.
Managerial Pearl: A multiproduct break-even calculation depends on the assumed sales mix.
Exam Strategy: Create one composite bundle reflecting the sales ratio before calculating break-even volume.
Question 10
The standard price for material is $5.00 per kilogram. During the month, the company purchased and used
15,000 kilograms at $5.40 per kilogram. What is the direct-material price variance?
A. $6,000 unfavorable
B. $6,000 favorable
C. $81,000 unfavorable
D. $75,000 favorable
Correct Answer: A. $6,000 unfavorable
Rationale: The material price variance is actual quantity multiplied by the difference between actual and
standard price. It equals 15,000 × ($5.40 − $5.00) = $6,000 unfavorable. The variance is unfavorable because the
actual price exceeded the standard. Total material cost is not itself the price variance.
,Why the other options are less appropriate: They reverse the favorable/unfavorable designation or report total
actual or standard cost.
Managerial Pearl: Price variance evaluates what purchasing paid—not how efficiently production used materials.
Exam Strategy: If actual price is greater than standard price, the price variance must be unfavorable.
Question 11
Variable overhead is budgeted at $7.50 per unit, and monthly fixed overhead is $54,000. Actual production was
9,000 units and actual total overhead was $126,000. How should performance be evaluated against the flexible
budget?
A. $4,500 favorable
B. $13,500 unfavorable
C. $4,500 unfavorable
D. $18,000 favorable
Correct Answer: C. $4,500 unfavorable
Rationale: At 9,000 units, flexible-budget overhead equals (9,000 × $7.50) + $54,000 = $121,500. Actual
overhead of $126,000 exceeds the activity-adjusted budget by $4,500. The result is unfavorable because more
cost was incurred than should have been incurred for the actual output. A static budget would provide a
distorted comparison.
Why the other options are less appropriate: They reverse the variance direction or compare actual cost with a
budget based on a different activity level.
Managerial Pearl: Flexible budgets separate activity-volume effects from cost-control performance.
Exam Strategy: Recalculate variable cost at actual activity, but keep budgeted fixed cost unchanged.
Question 12
Standard labor time is 0.60 hour per unit at $22 per hour. Employees produced 10,000 units using 6,200 hours.
What is the direct-labor efficiency variance?
A. $4,400 favorable
B. $4,400 unfavorable
C. $13,200 unfavorable
D. $136,400 unfavorable
Correct Answer: B. $4,400 unfavorable
Rationale: Standard hours allowed are 10,000 × 0.60 = 6,000 hours. The company used 200 more hours than
allowed. Multiplying the excess hours by the standard rate gives 200 × $22 = $4,400 unfavorable. The calculation
isolates labor-time efficiency from differences in hourly wage rates.
Why the other options are less appropriate: They reverse the direction, use total standard labor cost, or multiply
by an incorrect number of hours.
Managerial Pearl: Efficiency variances are valued at the standard rate so that wage-rate effects remain separate.
Exam Strategy: Compare actual hours with standard hours allowed for actual output, not budgeted output.
Question 13
An investment center reports average operating assets of $4,000,000 and operating income of $560,000.
Corporate management requires an 11% return. What is the center’s residual income?
A. $120,000
B. $176,000
C. $440,000
D. $504,000
,Correct Answer: A. $120,000
Rationale: The required return is $4,000,000 × 11% = $440,000. Residual income is actual operating income
minus that required return, or $560,000 − $440,000 = $120,000. Unlike ROI, residual income is expressed as a
dollar amount. A positive result shows that the division exceeded the company’s minimum return.
Why the other options are less appropriate: They report the required return, confuse ROI with residual income,
or apply the hurdle rate to income rather than assets.
Managerial Pearl: Residual income can encourage managers to accept profitable projects that might reduce
their existing ROI.
Exam Strategy: Remember: 𝑅𝐼 = 𝐼𝑛𝑐𝑜𝑚𝑒 − (𝐴𝑠𝑠𝑒𝑡𝑠 × 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑅𝑎𝑡𝑒).
Question 14
A selling division is operating at full capacity. Its product sells externally for $40, incurs $22 of variable
production cost, and requires a $3 variable selling cost on external sales. The selling cost would be avoided on
internal transfers. What is the minimum acceptable transfer price?
A. $22
B. $25
C. $40
D. $37
Correct Answer: D. $37
Rationale: At full capacity, an internal transfer displaces an external sale. The division incurs $22 of production
cost and sacrifices an external contribution margin of $40 − $22 − $3 = $15. The minimum transfer price is
therefore $22 + $15 = $37. Equivalently, it is the external price less the $3 selling cost avoided on an internal
transfer.
Why the other options are less appropriate: They omit opportunity cost, include the avoided selling cost, or
provide no benefit to the buying division.
Managerial Pearl: Minimum transfer price equals incremental cost plus opportunity cost.
Exam Strategy: First determine whether idle capacity exists; capacity status controls the opportunity-cost
component.
Question 15
Old equipment has a $140,000 book value, can be sold immediately for $38,000, and will incur $92,000 of
annual operating costs for four years. New equipment costs $240,000, will incur $38,000 of annual operating
costs, and will have a $20,000 terminal value after four years. Ignoring discounting, which conclusion is correct?
A. Keep the old equipment because its book value is lower
B. Replace it because total relevant profit improves by $34,000
C. Keep it because replacement reduces profit by $4,000
D. Replace it because the improvement is $174,000
Correct Answer: B. Replace it because total relevant profit improves by $34,000
Rationale: Operating-cost savings are ($92,000 − $38,000) × 4 = $216,000. Replacement also produces $38,000
from selling the old equipment and a $20,000 terminal value. Net benefit is $216,000 + $38,000 + $20,000 −
$240,000 = $34,000. The old equipment’s book value is a sunk cost and does not affect the decision.
Why the other options are less appropriate: They rely on book value or omit disposal proceeds, operating
savings, or terminal value.
Managerial Pearl: Book value influences accounting gains and losses but not the relevant economics of
replacement.
,Exam Strategy: Draw two columns—keep and replace—and include only future cash flows that differ.
Question 16
Which measure belongs primarily to the internal-business-process perspective of a balanced scorecard?
A. Employee training hours
B. Customer retention rate
C. Order-fulfillment cycle time
D. Return on invested capital
Correct Answer: C. Order-fulfillment cycle time
Rationale: Order-fulfillment time measures the efficiency of an internal operating process. Employee training is
normally classified under learning and growth, while customer retention belongs to the customer perspective.
Return on invested capital is a financial measure. A balanced scorecard connects these different perspectives to
organizational strategy.
Why the other options are less appropriate: Each belongs to another recognized scorecard perspective.
Managerial Pearl: Internal-process measures explain what the organization must perform exceptionally well.
Exam Strategy: Classify the stakeholder or process being measured before considering whether the result is
financial or nonfinancial.
Question 17
A controller is instructed to postpone recording supplier invoices received before year-end so that the division
will achieve its profit target. What is the controller’s most appropriate initial response?
A. Comply because the invoices can be recorded next period
B. Explain the misstatement, refuse the treatment, and follow established escalation procedures
C. Record only invoices that suppliers are likely to pursue immediately
D. Resign without documenting or discussing the issue
Correct Answer: B. Explain the misstatement, refuse the treatment, and follow established escalation
procedures
Rationale: Deliberately delaying valid liabilities and expenses misstates performance and violates professional
integrity. The controller should explain the accounting consequences, refuse to participate, document the matter,
and use the organization’s established reporting hierarchy. Immediate resignation may eventually become
necessary, but it is usually not the first response. Ethical reporting takes priority over a short-term performance
target.
Why the other options are less appropriate: They facilitate manipulation, use arbitrary recognition criteria, or
bypass reasonable internal resolution procedures.
Managerial Pearl: Performance systems create risk when incentives reward results without reinforcing ethical
boundaries.
Exam Strategy: In ethics questions, select the response that preserves accuracy, documents the concern, and
uses proper escalation.
Question 18
A regression model estimates monthly logistics cost as:
𝑌 = $125,000 + $3.20𝑋
where 𝑋is the number of transactions. At 40,000 transactions, actual logistics cost was $268,000. What does the
model indicate?
A. Actual cost was $15,000 above predicted cost
B. Actual cost was $15,000 below predicted cost
, C. Predicted cost was $268,000
D. Actual cost exactly matched expected cost
Correct Answer: A. Actual cost was $15,000 above predicted cost
Rationale: Predicted cost equals $125,000 + ($3.20 × 40,000) = $253,000. Actual cost was $268,000, which is
$15,000 higher than predicted. The difference warrants investigation but does not automatically prove poor
management. Data quality, unusual conditions, and model fit should be examined before assigning responsibility.
Why the other options are less appropriate: They reverse the difference, confuse actual and predicted cost, or
ignore the regression calculation.
Managerial Pearl: A predictive model creates an analytical benchmark, not automatic proof of managerial fault.
Exam Strategy: Calculate the predicted value first; only then compare it with the actual observation.
Question 19
A joint product can be sold at split-off for $180,000 or processed further for $52,000 and sold for $248,000.
What is the best decision?
A. Sell at split-off because joint costs must be recovered
B. Sell at split-off because additional revenue is only $16,000
C. Process further because incremental profit is $52,000
D. Process further because incremental profit is $16,000
Correct Answer: D. Process further because incremental profit is $16,000
Rationale: Additional revenue from processing is $248,000 − $180,000 = $68,000. After deducting the $52,000
further-processing cost, incremental profit is $16,000. Joint costs incurred before split-off are common to both
alternatives and are irrelevant. Processing further is preferable because incremental revenue exceeds
incremental cost.
Why the other options are less appropriate: They treat sunk joint costs as relevant or confuse additional
revenue with additional profit.
Managerial Pearl: Joint-cost allocation is useful for reporting but generally irrelevant to sell-or-process-further
decisions.
Exam Strategy: Ignore all costs incurred before the decision point.
Question 20
A customer generates $500,000 of revenue and $320,000 of product cost. Customer-specific activities include
150 orders at $300 each, deliveries costing $36,000, and returns costing $24,000. What is the customer’s
profitability?
A. $99,000
B. $84,000
C. $75,000
D. $120,000
Correct Answer: C. $75,000
Rationale: Order-processing cost is 150 × $300 = $45,000. Total customer cost is $320,000 + $45,000 + $36,000 +
$24,000 = $425,000. Customer profit is therefore $500,000 − $425,000 = $75,000. Customer-level analysis
reveals costs that a conventional gross-margin calculation may conceal.
Why the other options are less appropriate: They omit one or more customer-support activities or calculate
gross margin instead of customer profit.
Managerial Pearl: High sales volume does not guarantee high customer profitability.
Exam Strategy: Separate product cost from order-, delivery-, return-, and customer-sustaining costs.
